Terminal money…How money dies

Money doesn’t just die. It gasps for life; suffers; lingers; and then flatlines.

In January 2017, Venezuela’s currency, the bolivar, is on its deathbed. As this chart shows, the currency demonstrated early signs of weakness in 2013. As it took more and more bolivars to buy one U.S. dollar, as the blue line rose on the chart, the cost of living increased. Life has been difficult in Venezuela for several years. But the chart went parabolic in 2016. In other words, the bolivar is dying. But, it has not died yet. Merchants still accept it. Soon, they won’t.

As in the final days of money dying in Weimer Germany (1924), the people of Venezuela have begun to use wheelbarrows to carry their money. The security risk is minimal—thieves don’t want this much bulky paper—kind of hard to run from the owner when you’re pushing a wheelbarrow! In December of 2016, merchants began weighing money instead of counting it. [1] As in Weimer Germany, the wheelbarrow is worth more than what it’s carrying.

When money becomes terminal, lifestyles change. A story out of Venezuela, in January of 2015, had this paragraph:

“…People’s lives now revolve around standing in lines. They sleep on the streets to be the first in line to buy car batteries, laundry soap, tampons, and milk. They schedule their meals around being in line. Men and women of all ages now make their living by standing in line for others at 2 a.m. or earlier. They charge $3 to $7 for each product they will buy on someone’s behalf.”[2]

The first world empire to kill its money—or, at least, where our story begins—was Ancient Greece. Ancient Rome followed the same pattern. In the early days of the Roman Empire, their money, the denarius, was a coin holding about 4.5 grams of pure silver. As the empire became more expensive to maintain—and the supply of silver diminished– the government began diluting the silver content. By 265 A.D., there was only about 0.5% silver in the denarius. In that year, prices skyrocketed 1,000% across the Roman Empire. “Coin debasement and inflation helped lead to the demise of the Western Roman Empire, which would cease to exist by 476 A.D.” [3]

Let’s fast forward to 1720. A Scottish financier, speculator, and criminal, John Law, found himself running—or ruining—the finances of France. Law presented the King of France with the idea paper money could create wealth. Law said the solution to France’s debt and deficit-spending, would be to simply print money. Fiat money, he said, would create wealth. It worked, temporarily. Eventually, though, the economy of France collapsed and John Law and his family had to flee for their safety.

By 1789, the French forgot the lesson of money printing, and, once again, destroyed their economy with pieces of paper, called, assignats. This time, the government thought they were smarter than John Law. They believed they could effectively manage the printing of fiat money. They were wrong. The subsequent economic collapse sparked the French Revolution and the rule of Napoleon. One of Napoleon’s first actions was to introduce a new currency, a gold coin, in 1803. Prosperity followed.

Excluding China, where paper currency failures have been abundant, “there are 609 currencies no longer in circulation. Of these, at least 153 were destroyed as a result of hyperinflation caused by over-issuance. The remainder were revalued, destroyed by military occupation/liberation, renamed for political reasons, or were converted to another currency. The median age for these currencies is only 17 years.” [4] There is actually a money museum in Germany, archiving the history of money. It can be seen here.

As Americans, we tend to be ignorant of monetary history. The typical American, today, doesn’t know the history of our money, let alone the money of other countries. I’ve been told people living in the Middle East don’t trust paper money because they know it fails. Middle Eastern blue collar workers are eager to turn paychecks into precious metals. It’s been estimated the Indian population has about 22,000 tons of gold; the most of any populous. For them, hording gold has a religious connection. It is also cultural. Instead of acquiring life insurance, the Indian bride is given gold jewelry. It’s also a way to say, “Good luck.” [5]

In China, gold has been of interest since about 900 A.D. The influence of Buddhism shaped this gold desire. [6] In modern China, gold ownership was prohibited until 2002. Then, in September 2009, the government began encouraging their people to buy gold and silver. [A 2009 Chinese report can be seen here.] “Simply put, the Chinese government is trying to trigger a national gold craze…and it’s working. The Chinese public now has gold trading platforms on steroids.” [7] Since 2013, China has bumped India out of the position of the #1 gold importer. [8] China has also been the largest gold producer since 2007, all of which stays within its borders. It has been reported China is aggressively minining. Could the Chinese gold rush have something to do with the government saying, in 2011, that “the U.S. has already defaulted on its loans by allowing the dollar to weaken against other currencies—eroding the wealth of creditors including China”? [9]

Russia has openly discussed when the U.S. dollar will collapse. [10][10b] In 2005, Putin approved a plan to double Russia’s state gold holdings. In 2014, the Russian Central Bank was the biggest buyer of gold, among central banks. [11] In October of 2016, the Russian Central Bank had the highest monthly gold import since 1998. [12] Among the global gold experts I follow, there is a view both Russia and China have accumulated far more gold than the U.S. government declares. What both governments report as their gold holdings is likely less than their true holdings.

I laughed today when I heard a financial advisor say, “Gold companies need those negative commercials to sell gold. Without them, no one would be buying.” My guess: that person doesn’t understand monetary history. He also doesn’t understand the global gold demand. At the end of the third quarter, 2016, the United States came in fifth for gold consumer demand, representing about 10% of the consumption of China and India (based on five-year average consumption). [13]

Paper money, fiat money (paper declared valuable by the government), has a finite lifespan. History tells us paper money eventually dies. Gold and silver have been money for 5,000 years. It will always be money. Got some?

“Dollar” Bill is a real guy, with real knowledge on our nation’s financial calamity, and real solutions for what must be done to dig ourselves out of the hole we are in. Due to his career, Bill must remain “disguised” to protect his position. “Bill” loves America, sees the impending cliff we are all headed towards, and hopes that by sharing his inside knowledge of the failed monetary policy in our nation, that a fiscal “nuclear” event can be minimized.